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What is a capital gain, and how is it treated for tax purposes
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Capital Gain:
Capital gain arises whenever a capital asset such as stock, bond, and real estate etc. is sold for more than its original cost. There are two types of capital gain.
• Long-term capital gain: Long-term capital gain occurs whenever a capital asset is sold after holding such asset for more than 12 months.
• Short-term capital gain: Short-term capital gain occurs whenever a capital asset is sold after holding it for not more than 12 months.
Treatment of capital gain for tax purpose:
The capital gains (whether it is long-tern or short-term) are taxed at different rates and depending on the holding period of an asset. The following table tax rates attract on capital gain:
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Jeff Cambell was married on January 15, 2012. His wife, Laura, is a full-time student at the university and earns $625 a month working in the library. How many personal exemptions will Jeff and Laura be able to claim on their joint return Would it make any difference if Laura's parents paid for more than 50 percent of her support Explain.
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Person JC married his wife Person LC on January 15, 2012. Person LC is a full-time student and also works in the library for $625/month.
Persons JC and LC would like to know how many personal exemptions they will be able to file on their tax return.
• An exemption is a deduction from AGI (adjusted gross income) on your tax return worth $3,700 per person in 2011.
• A taxpayer is allowed to claim an exemption for: themselves, as well as an exemption for their spouse and any dependents (children or supported relatives) for whom the taxpayer provides more than half of their total support.
Based on the above information, we can state that Persons JC and LC would be able to claim two personal exemptions on their joint tax return.
The general rule is that parents who are providing support for their dependent full-time college student children are able to claim them as exemptions, even over the age of 24.
However, because Person LC is married and will be filing a joint return, her parents will not be able to claim her as an exemption. A personal exemption can only be claimed once.
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Briefly define the five filing categories available to taxpayers. When might married taxpayers choose to file separately
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Filling categories: There are five filing categories available to taxpayers and he or she can choose his or her category according to status. All the five categories are given below:
1. Single taxpayers: Unmarried or a person who was married previously and have legally separated from their spouses by either a separation or final divorce decree.
2. Married filing jointly : Married couple can file only one jointly tax return that combines their income and allowable deduction.
3. Married filing separately: Each spouse can file his or her own tax return and can show only his or her income, deduction, and exemptions.
4. Head of household: An unmarried or considered unmarried taxpayer who pays more than half of cost of keeping up a house for himself or herself and eligible dependent relative or child.
5. Qualifying widow or widower with dependent child: A taxpayer whose spouse died within 2 years of the tax year and who has a dependent child can use joint return tax rates and is eligible for the higher standard deduction.
Case when a married taxpayer chooses to file separate tax return:
When one spouse has a moderate income and substantial medical expenses and other has a low income and no medical expenses or very low medical expenses, then he or she can choose to file separate tax return for tax saving.
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Debra Ferguson received the following items and amounts of income during 2011. Help her calculate (a) her gross income and (b) that portion (dollar amount) of her income that is tax exempt.
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Murali and Amita Kapoor are a married couple in their early 20s living in Denver. Murali Kapoor earned $73,000 in 2011 from his job as a sales assistant. During the year, his employer withheld $4,975 for income tax purposes. In addition, the Kapoors received interest of $350 on a joint savings account, $750 interest on tax-exempt municipal bonds, and dividends of $400 on common stocks. At the end of 2011, the Kapoors sold two stocks, A and B. Stock A was sold for $700 and had been purchased four months earlier for $800. Stock B was sold for $1,500 and had been purchased three years earlier for $1,100. Their only child, Nalin, age 2, received (as his sole source of income) dividends of $200 from Hershey stock.
Although Murali is covered by his company's pension plan, he plans to contribute $5,000 to a traditional deductible IRA for 2011. Here are the amounts of money paid out during the year by the Kapoors:
Critical Thinking Questions
1. Using the Kapoors' information, determine the total amount of their itemized deductions. Assume that they'll use the filing status of married filing jointly, the standard deduction for that status is $11,600, and each exemption claimed is worth $3,700. Should they itemize or take the standard deduction Prepare a joint tax return for Murali and Amita Kapoor for the year ended December 31, 2011, that gives them the smallest tax liability. Use the appropriate tax rate schedule provided in Exhibit 3.3 to calculate their taxes owed.
2. How much have you saved the Kapoors through your treatment of their deductions
3. Discuss whether the Kapoors need to file a tax return for their son.
4. Suggest some tax strategies that the Kapoors might use to reduce their tax liability for next year.
REFERENCE EXHIBIT:
Critical Thinking Questions
1. Using the Kapoors' information, determine the total amount of their itemized deductions. Assume that they'll use the filing status of married filing jointly, the standard deduction for that status is $11,600, and each exemption claimed is worth $3,700. Should they itemize or take the standard deduction Prepare a joint tax return for Murali and Amita Kapoor for the year ended December 31, 2011, that gives them the smallest tax liability. Use the appropriate tax rate schedule provided in Exhibit 3.3 to calculate their taxes owed.
2. How much have you saved the Kapoors through your treatment of their deductions
3. Discuss whether the Kapoors need to file a tax return for their son.
4. Suggest some tax strategies that the Kapoors might use to reduce their tax liability for next year.
REFERENCE EXHIBIT:
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Define and differentiate between the average tax rate and the marginal tax rate. How does a tax credit differ from an itemized deduction
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If Amy Phillips is single and in the 28 percent tax bracket, calculate the tax associated with each of the following transactions. (Use the IRS regulations for capital gains in effect in 2011.)a. She sold stock for $1,200 that she purchased for $1,000 5 months earlier.
b. She sold bonds for $4,000 that she purchased for $3,000 3 years earlier.
c. She sold stock for $1,000 that she purchased for $1,500 15 months earlier.
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Shauna and Conan O'Farrell have been notified that they are being audited. What should they do to prepare for the audit
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Distinguish between gross earnings and take-home pay. What does the employer do with the difference
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Define and differentiate between gross income and AGI. Name several types of tax-exempt income. What is passive income
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Steve and Beth Compton are married and have one child. Steve is putting together some figures so that he can prepare the Comptons' joint 2011 tax return. He can claim three personal exemptions (including himself). So far, he's been able to determine the following with regard to income and possible deductions:
Given this information, how much taxable income will the Comptons have in 2011 ( Note: Assume that Steve is covered by a pension plan where he works, the standard deduction of $11,600 for married filing jointly applies, and each exemption claimed is worth $3,700.)
Given this information, how much taxable income will the Comptons have in 2011 ( Note: Assume that Steve is covered by a pension plan where he works, the standard deduction of $11,600 for married filing jointly applies, and each exemption claimed is worth $3,700.) Essay
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Use Worksheets 3.1 and 3.2. Qiang Gao graduated from college in 2011 and began work as a systems analyst in July 2011. He is preparing to file his income tax return for 2011 and has collected the following financial information for calendar year 2011:
a. Prepare Qiang's 2011 tax return, using a $5,450 standard deduction, a personal exemption of $3,500, and the tax rates given in Exhibit 3.3. Which tax form should Qiang use, and why
b. Prepare Qiang's 2011 tax return using the data in part a, along with the following information:
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a. Prepare Qiang's 2011 tax return, using a $5,450 standard deduction, a personal exemption of $3,500, and the tax rates given in Exhibit 3.3. Which tax form should Qiang use, and why
b. Prepare Qiang's 2011 tax return using the data in part a, along with the following information:
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Mary Watson is 24 years old and single, lives in an apartment, and has no dependents. Last year she earned $45,000 as a sales assistant for Focused Business Analytics; $3,910 of her wages were withheld for federal income taxes. In addition, she had interest income of $142. Estimate her taxable income, tax liability, and tax refund or tax owed.
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Demonstrate the differences resulting from a $1,000 tax credit versus a $1,000 tax deduction for a single taxpayer in the 25 percent tax bracket with $40,000 of pre-tax income.
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What two factors determine the amount of federal withholding taxes that will be deducted from gross earnings each pay period Explain.
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Even though many were eliminated by the Tax Reform Act of 1986, tax shelters are still around. Beware, however, because some are legitimate, while others are not. American taxpayers have the right to lower their tax burdens, so long as they do it by legal means. This project will help you to learn about any tax shelters currently allowed by law.
Where can you go to find tax shelter opportunities First, try the financial section of your newspaper. There may be advertisements or articles on tax shelters, such as tax-free bond funds. A bank is another source. Simply ask at the "new accounts" department for tax shelter information. Another major source of new tax shelters is the brokerage houses that sell stocks, bonds, and other securities to the investing public. If you have access to a brokerage house, ask them for tax shelter information. Also, you might want to search for "tax shelters" on the Internet.
List the tax shelters you've found. Do any apply to you now, or are there any that you'd like to use in the future Finally, pull up the IRS Web site at http://www.irs.gov and search for "abusive tax shelters" to determine if the tax shelters you have found are allowed by current tax laws.
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Explain how the following are used in filing a tax return: (a) Form 1040, (b) various schedules that accompany Form 1040, and (c) tax rate schedules.
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If you itemize your deductions, you may include certain expenses as part of your itemized deductions. Discuss five types of itemized deductions and the general rules that apply to them.
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Cheryl Stern, who is single, goes to graduate school part-time and works as a waitress at the Sunset Grill in Seattle. During the past year (2011), her gross income was $18,700 in wages and tips. She has decided to prepare her own tax return because she cannot afford the services of a tax expert. After preparing her return, she comes to you for advice. Here's a summary of the figures that she has prepared thus far:
Cheryl believes that if an individual's income falls below $20,350, the federal government considers him or her "poor" and allows both itemized deductions and a standard deduction.
Critical Thinking Questions
1. Calculate Cheryl Stern's taxable income, being sure to consider her exemption. Assume that the standard deduction for a single taxpayer is $5,800, and that each exemption claimed is worth $3,700.
2. Discuss Cheryl's errors in interpreting the tax laws, and explain the difference between itemized deductions and the standard deduction.
3. Cheryl has been dating John Brooks for nearly four years, and they are seriously thinking about getting married. John has income and itemized deductions that are identical to Cheryl's. How much tax would they pay as a married couple (using the filing status of married filing jointly and a standard deduction of $11,600) versus the total amount the two would pay as single persons (each using the filing status of single) Strictly from a tax perspective, does it make any difference whether Cheryl and John stay single or get married Explain.
Cheryl believes that if an individual's income falls below $20,350, the federal government considers him or her "poor" and allows both itemized deductions and a standard deduction.
Critical Thinking Questions
1. Calculate Cheryl Stern's taxable income, being sure to consider her exemption. Assume that the standard deduction for a single taxpayer is $5,800, and that each exemption claimed is worth $3,700.
2. Discuss Cheryl's errors in interpreting the tax laws, and explain the difference between itemized deductions and the standard deduction.
3. Cheryl has been dating John Brooks for nearly four years, and they are seriously thinking about getting married. John has income and itemized deductions that are identical to Cheryl's. How much tax would they pay as a married couple (using the filing status of married filing jointly and a standard deduction of $11,600) versus the total amount the two would pay as single persons (each using the filing status of single) Strictly from a tax perspective, does it make any difference whether Cheryl and John stay single or get married Explain. Essay
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